Mergers in food biz will fatten support for top-tier brands

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Unilever's offer to buy Bestfoods fueled speculation of industrywide consolidation and sent Wall Street rallying around food company stocks. But Madison Avenue also stands to gain if all the talk about mergers and acquisitions becomes a reality.

"Theoretically, when an industry consolidates, it becomes a lot more rational from a competitive standpoint not spending as much against trade discounting but focusing instead on higher-quality marketing like advertising," said Andrew Lazar, an analyst at Lehman Bros.


Mr. Lazar pointed to the consolidation of cookie and cracker marketers as a good example of the spending shift sparked by mergers and acquisitions.

"Now that Keebler and Nabisco own 65% of the category, there is a much greater focus on advertising and new products and generally higher-quality brand building," he said.

Unilever had earlier pledged to increase marketing support against a winnowed roster of its own core brands. In February, the consumer goods giant said it would up spending for its chosen 400 brands by $1.6 billion during the next five years (AA, Feb. 28).


With its proposed $18.4 billion acquisition of Bestfoods, which also has increased marketing against core global brands, Unilever ideally would be able to gain efficiencies that would allow for greater ad spending to support the companies' corresponding categories, such as soup and dressings.

Unilever's core agencies, including McCann-Erickson Worldwide, Ogilvy & Mather Worldwide and J. Walter Thompson Co., stand to gain business if the acquisition of Bestfoods goes through. Bestfoods' current roster includes Omnicom Group's BBDO North America for brands including Hellmann's, Knorr and Skippy, and Bates USA for its Bestfoods Baking Co. division brands, including Entenmann's.

"Ideally, the theory behind consolidation is to put businesses together that have overlapping portfolios and can gain cost savings from reduced overhead that allow you to put dollars into brand building," said Erika Long, analyst with J.P. Morgan Securities.

Clearly, Unilever intends to do just that with recent acquisitions of like businesses, among them Ben & Jerry's Homemade, which aligns with its Good Humor-Breyers ice cream business, and French mustard marketer Amora Maille, which aligns with such condiments and sauce brands as Lawry's and Promise.

Bestfoods, which last year hiked marketing expenditures 2% to $996 million, according to a company spokesman, would fit nicely with Unilever's strategy. Bestfoods' efforts have been focused against synergistic brands including Hellmann's dressings, Mazola oils and Knorr soups and bouillons.

Unilever's bid for Bestfoods, expected to be sweetened after the initial $66 per share was rejected, revived speculation about food industry consolidation dating back to September's failed merger discussions between H.J. Heinz Co. and Bestfoods.


In light of the Unilever overture, Heinz reportedly revived its own bid for Bestfoods and offered $72 per share.

Among other companies said to be ripe for acquisition are Nabisco Group Holdings Corp., which is already on the block; Quaker Oats Co., which has seen meteoric growth for much of its portfolio; and Flowers Industries' Keebler Foods.

"The food group has been in the doghouse for two years, and valuations are pretty cheap right now. So when Unilever offers a 50% premium for a company, people are going to stand up and take notice," ceded DLJ Securities' Bill Leach. However, he added, "it's a mistake to think this is the beginning of a new trend because Unilever and Nestle are the only major food companies that could afford to pay these price tags."

What's more likely than more takeovers, said J.P. Morgan's Ms. Long, is mergers of equal companies afraid to lose relative size in the face of a newly consolidated retail environment. Either way, Wall Street got excited last week, with stocks for Nabisco, Bestfoods, Campbell Soup Co. and Heinz surging, despite falling prices throughout the rest of the market.

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